The Asbury Park Press’ May 1 article, “Crowd concerns,” did a good job in pointing out some of the concerns and potential pitfalls of crowdfunding, a method of soliciting money over the Internet as a way for start-ups and other small companies to raise money and create jobs.
It should also be noted that crowdfunding sites such as Kickstarter have been around for some time. The difference between these sites and the “equity or loan”- based versions now being proposed in the JOBS (Jumpstart Our Business Startups) Act is that the current sites arrange for individuals to make donations or contributions to projects, ranging from local indie bands needing funds to tour or make a CD to art projects and nonprofits.
The returns for individuals giving money are not financial. Instead, they may receive perks like a free CD or a free pass to an art exhibit, provided the fundraising for the project is successful.
With equity crowdfunding, the stakes are much higher, as investors are expecting and are entitled to a financial return. For this reason, businesses must have realistic goals and expectations about the capital they can raise, and be prepared to offer a clear business model as well as projected revenue and profit.
Just as important is the need for investors to go in with eyes wide open.
Crowdfunding sites, actually intermediaries between the business and the investor, should be responsible for vetting the businesses they carry on their site, and should maintain a repository of information that the business would provide to assist the investor in making investing decisions.
Done right, this innovative means of raising capital will free businesses from some of the more costly and time-consuming regulations that the Securities and Exchange Commission now requires. From an investor’s perspective, sufficient due diligence and research must be done before making an investment.
In the end, crowdfunding offers great potential for entrepreneurs and small- to medium-size businesses to tap the demand that the retail investor brings to capital markets.
Likewise, investors will have a straightforward and inexpensive way to support entrepreneurs and companies that they feel have merit and the potential to succeed, both at the community and national level.
Source: app.com – Asbury Park Press – Tom Emerson